1. business and industrial

18 March 2015
Shanghai, China
Breakbulk
China’s “New Normal” –
Challenges and Opportunities
Opening Address
Breakbulk China 2015
Foreign media coverage of China has turned notably
negative over the last year or so
Source: 2015 China business report, Strategy& analysis
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The media landscape reflects a serious decline in confidence
about China’s future among both MNCs and domestic firms
Business Confidence - Foreign Multinationals
Business Confidence - Domestic Chinese Firms
136
78%
117
68%
63%
43%
2010
2014
American Chamber suvey
2010
2014
European Chamber survey
2010
2014
Enterpreneurs confidence index
Source: American Chamber in China, European Chamber in China, Sina Finance, Strategy& analysis
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The underlying reason is that China is in transition and
faces significant economic, social, and political challenges
Chinese Real GDP, 1980 – 2030E, RMB, bn
Major Challenges
140,000
14%
130,000
12%
120,000
10%
110,000
8%
100,000
90,000
6%
80,000
4%
70,000
2%
60,000
0%
50,000
Real GDP Growth
40,000
-2%
2014E
-4%
Real GDP
30,000
20,000
-6%
10,000
-8%
0
-10%
• Economic
– Potential GDP growth rate declining
– Increasing structural imbalance
– Slow recovery elsewhere (e.g., EU)
• Social
– Rising inequality (Gini coefficient)
– Pollution / Environmental degradation
– Safety issues (e.g., food)
• Political
– Endemic corruption at all levels
– Domestic unrest (e.g., HK, Xinjiang,
Tibet)
2030E
2025E
2020E
2015E
2010
2005
2000
1995
1990
1985
1980
– Geopolitical tensions (e.g., Taiwan,
Senkaku / Diaoyu, South China Sea)
Source: The Economist Intelligence Unit
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Beijing’s dilemma is how to resolve the tension between the
political necessity and economic reality of high vs. low growth
Economic Reality
Political Necessity
• Supply-side
– Surplus farm labor
declining
3-4%
– Low capital efficiency
GDP
Growth
Target
≥7.5%
– Rate of technological
progress declining
• Demand-side
– Export flat and not likely
to improve without major
change
– Domestic consumption
and service sector
development hardly
compensate the growth
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• Increasing local government
debt
• Widening income gap
• Avoid hard landing of
China’s economy
• Control the financial system
and prevent it from financial
crisis
• Ensure stable employment
and thus to maintain a
stable society
• Build confidence and
continuously attracting
investment
• Severe environmental issues
• Instable financial system
• Growing inflation
Confidential property
4
Beijing has no choice but to implement a challenging
reform program – the next 3-5 years will likely be decisive
1
Slow Down
Further investment-led growth will only exacerbate China’s financial,
environmental, natural resources, and other problems
Clean Up
While highly successful, China’s current growth model also produced
numerous negative side effects - including endemic corruption, rising
inequality, safety issues, severe pollution, and environmental degradation
Implement
Structural
Reforms
The role of the government must change from direct intervention to
facilitating the ongoing transition to a more market-based economy
Increase
Domestic
Consumption
While domestic consumption has actually grown at a healthy rate, much
more must be done to free up latent disposable income
Upgrade
Industrial
Base
China must become more competitive in higher value-added industries
through top-down policy and bottom-up firm-specific initiatives
2
3
4
5
Source: “Will China’s New Leaders Step Up to the Plate?”, Jullens, Strategy+Business, Nov 2013
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Confidential property
5
The new leadership team’s strategy under Xi Jinping and Li
Keqiang, is becoming increasingly clear
Economic Reforms
+
Political Stability
+
The Chinese Dream
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Nevertheless, the next few years will be quite challenging –
a smooth transition is unlikely
Personal view (next 1-3 years)
Bearish
Same
Bullish
GDP growth
Real estate bubble
Economic
challenges
Debt crisis
Industrial overcapacity
Labor cost advantage
Geopolitical relations
Political
challenges
Domestic political stability
Corruption
Social
challenges
Social unrest
Environmental challenges
Source: “China – Recent Developments and Mid-Term Outlook”, Jullens, Kellogg School of Management, Oct 2013
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The new business environment will present domestic firms
and MNCs with both challenges and opportunities
Improve core capabilities and move up the value chain
– Innovation, Operational Excellence, Go-To-Market
Domestic
Firms
Start expanding into international markets
– Market access
– Technology / know-how transfer
– Exposure to world-class performance levels
Develop much more granular understanding of growth opportunities and
challenges
Foreign
MNCs
Re-assess domestic operations to improve productivity and efficiency
Significantly tighten operational control
Defend position against increasingly capable Chinese competitors - both in
China and elsewhere
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Domestic Firms
Chinese firms must evolve from acquiring basic production
expertise to mastering world-class capabilities themselves
World-Class
Advanced
Incremental
Basic
“Know-Why”
(world-class innovation)
“Know-How”
(basic production)
“CAPABILITY CHAINING”
1
External
Contracting
2
Internal
Development
3
M&A /
Partnerships
Source: Adapted from Bell and Figueiredo (“Building Innovative Capabilities in Latecomer Emerging Markets Firms: Some Key Issues”, Oxford University Press, 2012
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Domestic Firms
Many emerging market firms find it difficult to manage the
required “capability chaining” process
Profit- versus growth- oriented firms
Sales and profits growth trajectories over consecutive five-year periods (N = ~105,000 firms in Brazil, Russia, India, and China)
42%
40%
• Most emerging market firms embody
an important – they are both first
movers and latecomers
36%
35%
13%
10%
15%
• In their eagerness to get ahead, many
firms focus primarily on top-line growth
and neglect to lay the foundation for
profitability in any environment other
than a rapidly expanding market
Low/Low
(Period 2)
• In reality, profit-oriented firms are
significantly more successful over the
long-term than growth-oriented firms
8%
High/High
(Period 2)
Low/High
(period 2)
Profit-oriented firms
(Low/High, period 1)
High-Low
(Period 2)
Growth-oriented firms
(High/Low, period 1)
Sources: “Rough Diamonds”, Park, Zhou, Ungson (2013) / “How Emerging Giants Can Take on the World”, Jullens, Harvard Business Review, Dec 2013
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Domestic Firms
Successful emerging market firms typically follow a fourstep process of developing advanced capabilities over time
1
Seize the moment
• Spot and exploit nascent
business opportunities
• Develop foundational
capabilities
4
1980s
Move Up
and Out
1994
• Develop differentiated capabilities
system
• Expand into highervalue customer
segments and
international markets
3
2
Build
strength
• Refine EM business
model
• Start catch-up
journey to worldclass
Scale up & consolidate
• Acquire weaker local competitors to become domestic
market leader
• Fill capability gaps (e.g., R&D, thirdparty vendors, M&A)
Initial focus on increasing quality
and cutting costs
Listed on Shenzhen Stock Exchange and
established tech center with annual R&D
investment of 4.5% of total sales
1998
Achieved 70% domestic market share for
universal joints and started supplying to
Sino-foreign JVs such as GM and Ford
2001
Purchased a 21% stake in UAI (brakes)
for US$ 2.8 million
2013
Acquired 123 systems to enter EV
battery market
2013
Became China’s second largest
private company --annual revenues
of over US$ 10 billion
Source: “How Firms in Emerging Markets Can Play Catch-Up”, Jullens, Strategy+Business, Jan 2014
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Foreign Multinationals
MNCs will face a much more challenging environment in
China – for many, the easy phase is mostly over
1
New Business
Environment
The new business environment will present significant business and
regulatory challenges but also new profit opportunities
Shifting
demographics
While overall population size will continue to grow, the underlying mix will
change significantly – i.e., China is aging
New
technologies
Chinese consumers are rapidly adopting new technologies such as the
Internet – foreign MNCs are not necessarily advantaged
Mid-Market =
Battlefield
Growth will often come primarily from the rapidly developing mid-market of
“Good Enough” products
Emerging
giants
Local competitors are improving rapidly – e.g., Chinese Mid-Market
Innovators and other Emerging Giants
2
3
4
5
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Foreign Multinationals
For example, few MNCs have the capabilities required to
compete in China’s mid-market - “Good Enough” just isn’t
Key Mid-Market Capabilities
( Ranked by Importance )
Must-Have Capabilities
Design to cost
capabilities
Product
standardization
Product localization
R&D transfer
Fast development
process
Readiness
Trial and
error culture
Source: Strategy& Mid-Market Study 2012/2013
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Foreign Multinationals
For MNCs, winning in China is often a function of making a
series of difficult trade-offs along at least eight dimensions
1 China business model – Rethink business model to support unique local requirements, including
product, price, branding, marketing, distribution, and operations
2 Low-price products – Develop “low-priced” products specifically designed for Chinese (mid-market)
customers, as opposed to merely introducing “low-cost” versions of existing world-class products
3 Value chain migration – Transfer core activities to China to narrow cost gaps with domestic entry-level
market competitors through local product development, sourcing, and manufacturing
4 Selective partnerships – Consider entering into partnerships with local suppliers to fill gaps in entry-
level market product portfolio, develop optimal distribution footprint, and navigate China’s unusually
complex regulatory environment
5 Multi-brand strategy – Consider developing a multi-brand strategy to successfully operate across
premium and entry-level market price points as well as multiple product categories
6 Multi-channel strategy – Develop cost-effective ways of selling across multiple channels and price
points
7 Strong local organization – Ensure that management is capable and sufficiently empowered to enable
fast decision-making and sensitivity to local market requirements. Clarify decision rights and put in
place a strong governance structure
8 Global mindset – A firm’s success is tied to the mindset of its top managers. At a minimum, ensure
that headquarters has at least a basic understanding of China’s unique business and regulatory context
Source: “China’s Mid-Market: Where “Good Enough” Just Isn’t”, Jullens, Strategy+Business, July 2013
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Finally, the current economic environment will bring both
challenges and opportunities for the breakbulk industry
On the whole, Chinese infrastructure projects and construction will continue to slow, resulting in
less need for imported steel, construction equipment and materials
Challenges
The infrastructure projects that do materialize, will likely do so much further inland than
breakbulk shippers tend to venture
Uncertain export flows will encourage container lines to continue their recent cannibalization of
what were traditionally breakbulk shipments, resulting in persistent downward pressure on rates
The very profile of the breakbulk customer will potentially shift toward more SOE and Chinese
shippers, making business development a strategic challenge
As Chinese infrastructure firms seek new channels for future growth in Africa and S.E. Asia,
export breakbulk and project shipments will likely increase in the medium term
Long term efforts to build inland ports, long a feature of the “Go-West” strategy, are continuing
to progress, providing opportunities to those who are able to venture inland
Opportunities
The global expansion of the Chinese automotive sector will happen, potentially providing a
boost to the Ro-Ro sector
Further Chinese expansion into developing markets is a certainty, opportunities will exist for
many years to come for those whole secure the relationships
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Contact information
Relevant Publications
Harvard Business Review
John Jullens
Partner, Strategy&
–
Formerly Booz & Company
–
Suite 2511, One Corporate Avenue
No. 222 Hu Bin Road
Shanghai 200021, P.R. China
Telephone: +86 21 2327 9800
Fax: +86 21 2327 9833
[email protected]
www.johnjullens.com
CEIBS Business Review
–
–
Confidential property
“Choose Your Capability Path” -- CEIBS Business
Review, Mar 2014
“Modern Zorro is Out” - CEIBS Business Review, Feb
2014
Strategy + Business
–
–
–
–
Strategy&
“How Emerging Giants Can Take on the World”-Harvard Business Review, Dec 2013
“Is China the World’s Next Rust Belt?” -- Harvard
Business Review China, Apr 2013
“It’s a Race to the Bottom in China’s Auto Market” –
Strategy + Business, Sep 2014
“How Firms in Emerging Markets Can Play Catch-Up”- Strategy + Business, Jan 2014
“Why Strategy Matters in Emerging Markets After All”-Strategy + Business, Dec 2013
“China’s Mid-Market: Where “Good Enough” Just
Isn’t”-- Strategy + Business, July 2013
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